Setting Up a Special Needs Trust with Life Assurance

Parents of special needs
children will have special needs for insurance. Their financial planning will
be quite different due to the fact that they will need to continue to provide
for the special child even well into adulthood and even after the parents are
gone. This will have to take into consideration their continuous care and
upkeep, as well as medications, therapy and other expenses related to managing
their disability.

With diligent financial planning,
you as a parent can be confident that your child’s lifetime needs are covered,
even long after you are gone. One important component of the financial planning
process will be to determine how much life assurance is needed.

Some Mistakes

When providing for special
needs children through life assurance and the remaining estate, here are two
mistakes you need to avoid:

Naming the child as the direct beneficiary.

Leaving the money to the special needs child
directly.

Leaving the child’s inheritance to another
member of the family.

If the child is a beneficiary
to a sizable estate, these may disqualify the child from government benefits
that he may have been receiving. Also, leaving the money directly to a child
who may be mentally impaired will lead to problems as he is not equipped to
make sound financial decisions. In addition, if the money is left with another
individual, it may be counted as that person’s assets and may be subject to
creditors, seizure, divorce, bankruptcy and litigation.

A Special Needs Trust

This may be the solution for
this situation. Creating a special needs trust will help ensure that there is
enough money for the child to spend on living expenses. A special needs trust
is a set-up where it is managed by a trustee (who is prohibited from benefiting
from the proceeds of the trust personally). The trustee is responsible for
dispersing the funds. The contents of a trust may comprise the proceeds of a
life insurance policy, as well as property, stocks and savings.

Here are three kinds of special
needs trusts to consider, based on the specific situation of the child:

General
support trust.

This pays for almost all the needs of the child (food and
shelter, clothing, home insurance, property taxes and utilities). It can also
provide cash for the child. However, this will disqualify him for any
government assistance.

Self-settled
trust.

If the child is disabled but can make sound decisions, this trust
can be created using the child’s own funds that they can then decide how to
spend. However, if the child is also receiving government assistance, these
will revert back to the government once the child dies and will be taken from
the assets in the trust.

Third-party
settled trust.

This is what is usually used and will only provide for
specific expenses such as hospital and dental bills, computer equipment, health
aides and equipment for the home and rehabilitation expenses.

Funding the Trust with Life Assurance or Life Insurance

When funding a special needs
trust, you should choose the right life assurance product to fit your specific
situation.

Whole life assurance is ideal
since the death benefit will be paid out at any time a covered parent dies,
since the coverage is up to the lifetime of the parent. However, it should be
not that the cash value (and subsequently, the required premium payments) may
be affected by the current economic conditions.

Term life assurance will be the
most affordable, however, this is usually only for the short term. In the event
that the parents outlive the policy coverage
period, this means that the trust will not be funded when the parents die after
the policy has expired.

Second to die life assurance is
more affordable than two policies and will pay out when the surviving spouse
dies. But both parents must determine whether the surviving spouse can survive
with his or her income after the death of the first spouse.